News and Blog

Trading in Goods post Brexit

For many, Brexit continues to be the undefined, being negotiated by the unprepared, in order to get the unspecified, for the uninformed. For others, Boris Johnson’s hard-knuckled talk, timed to boil down to deadline day, represents the dominant strategy that always had to be played against a fiercely rigid opposition- one that also risks losing out, albeit less than the protagonist.

In this post we will focus on practical examples of trading in goods post Brexit on 1 January 2021, paying special attention to taxation.

IMPORTER OF EU GOODS

Dom is a spectacles retailer based in England. Some of the spectacles he sells are purchased from a Spanish supplier called Ojos. What will be the difference between shipments arriving after 1 January 2021 compared to now?

In short, all imports of goods arriving into the country will be subject to import VAT and potentially customs duty. Traders will require an EORI number to move goods between the UK and non-EU countries.

Import VAT and Postponed Accounting
Concerning VAT, there will be no difference in Dom importing goods from an EU or non-EU country. “Postponed accounting” will be available for all imports made by a VAT registered business- that is for both EU and non-EU imports. Postponed accounting means Dom will declare and recover import VAT on the same VAT Return, rather than having to pay it upfront and recover it later. This is a cash-flow benefit for businesses that previously imported from outside the EU where VAT was paid on arrival and later claimed as input tax on a VAT return up to three months later. Import VAT certificate (C79) will no longer be issued, but can instead be downloaded from the HMRC website.

Dom does not need to apply to use postponed VAT accounting: it can be requested automatically when the shipment arrives. If however Dom deregisters, VAT on future imports would be paid at the time of arrival in the UK and become an exra business cost.

Customs Duty
From 1 January 2021, Dom will need to make customs declarations when he imports goods from the EU. In some situations, you can delay making a declaration for up to 6 months after you imported the goods. For controlled goods such as alcohol and tobacco however, a declaration must be made when the goods arrive. You may want to get someone to deal with customs for you or find a customs provider to help you.
A comprehensive set of actions for goods importers can be revised by visiting gov.uk, including finding out whether you can use postponed VAT accounting and checking the rate of customs duty and VAT on imports.

Instrastat
For UK businesses that buy goods from EU suppliers exceeding £1.5m, intrastat declarations must continue to be completed in 2021 for arrivals of goods from the EU. For dispatches from the UK, the intrastat reporting obligations only apply to goods being ‘exported’ from Northern Ireland to any EU VAT registered customers in case a threshold of £250,000 is exceeded.

EXPORTS

Back to Dom, he has received an order from a consumer based in Germany for a pair of spectacles. Until 31 December 2020, Dom will ship it to the customer and charge UK VAT at 20%. If Dom sells more than €100,000 of goods into Germany in a calendar year, to non-VAT registered customers, he must register for VAT in Germany and charge 19% German VAT on future sales. This is the essence of the “distance selling threshold” rules.

From 1 January 2021, the situation changes. First, the distance selling rules become obsolete, as the UK is no longer part of the EU. Instead, any shipments of goods from a UK supplier will be subject to VAT and duty when they arrive in the other EU country, so 19% VAT plus duty in the case of Germany. Dom’s sales will be zero rated for UK VAT purposes, in the same way that exports of goods to non-EU countries are zero rated.

This may pose a commercial and competitive hurdle for Dom. If before 1 January 2021 Dom bought spectacles from Ojos in Spain for £50 and applied a mark-up of 100% plus VAT for his sales, he will charge £120 for a business-to-consumer sale in Germany. If after 31 December 2020 Dom now pays customs duty of say 5% when the goods are imported from Spain to the UK, this will yield a cost of sales figure of £52.50 and therefore a selling price of £105. The export to the German consumer will now be zero rated for UK VAT but subject to German VAT and customs duty when it arrives there. If the import duty was 10%, with the VAT added on top, this would yield a final selling price of around £137, that is £105 plus £10.50 duty and 19% VAT on £115.50.

Warehouses in Europe
Like Dom, there is the possibility that clients could face a double duty charge on goods arriving into the UK from an EU supplier and then shipped out to the EU again. An EU warehouse may be an option in this scenario, obtaining a local VAT number to buy and sell goods from there. The challenge is for each business to consider its supply chain and where optimal trading outcomes may lie. Afterall some goods that are standard rated in the UK might be subject to reduced VAT rates in other EU countries. And some goods will be duty free to help the position further.

OTHER VAT SCHEMES

Triangulation
Triangulation is another important VAT simplification that may be lost after Brexit. UK companies currently relying on triangulation in order to avoid the need to register for VAT in an EU Member State, will also need to assess their position. Such arrangements will no longer be available, and this may result in multiple VAT registration requirements.

Margin schemes
Margin schemes involve goods, such as the second-hand margin schemes. In October 2020, HMRC issued a policy paper ‘Accounting for VAT on goods moving between Great Britain and Northern Ireland from 1 January 2021‘. The paper suggests that margin schemes will remain available for sales of goods that are purchased in Northern Ireland or the EU, whether sold to customers in Northern Ireland, Great Britain or the EU. On the contrary, margin schemes will not usually apply for sales in Northern Ireland where the stock is purchased in Great Britain.

DUTY FREE

Concerning us all, the Treasury has published its policy decisions regarding duty free shopping carried by passengers across borders:

  • duty-free shopping will be extended to include EU countries;
  • tax-free sales in airports of goods, such as electronics and clothing, for passengers travelling to non-EU countries will end; and
  • VAT refunds for overseas visitors in British shops will be removed and replaced by a buy-and-ship mechanism.

WHEN MIDNIGHT STRIKES

All the while it is worth remembering that a sub-plot continues to develop in the guise of late-in-the-day Brexit negotiations, akin to booking a GP appointment for a patient(s?) approaching life-support. A free trade agreement post-Brexit is not the whole solution for UK traders. Many of the practical issues of moving goods will not be resolved by a free trade agreement. A free trade agreement will not remove the obligation to submit customs declarations for example, therefore problems with who is legally permitted to make declarations on export and import will arise. A deal would provide for tariff-free trade on goods that qualify as EU or UK made, helping cushion the blow for sensitive sectors including automotive and agriculture. It would also include other measures to help trade flow — recognition of truckers’ permits for example. Most trade experts agree it would be better than nothing.

HOW TO PREPARE FOR BREXIT – CHECKLIST

We would urge our clients to visit gov.uk/action-2021 for a step-by-step revision on how your business may be affected.

The Institute of Chartered Accountants in England and Wales has prepared a quick-start guide, outlining a variety of areas that could impact your business post Brexit, to help you prepare for when the transition period has ended. 10 questions to ask include:

  1. Where will you get more cash, if you need it?
  2. What help do you need to access potential new markets?
  3. Have EU/EEA/Swiss-national employees registered for the settlement scheme?
  4. How would additional customs duties affect your sales and supply chain?
  5. Are you ready for customs? VAT and customs duty requirements from 1 January 2021
  6. Can you benefit from simplified import procedures?
  7. How will your principal contracts be affected by Brexit?
  8. Do you receive personal data from the EU/EAA?
  9. How will changes to VAT affect you?
  10. Do your corporate reports reflect Brexit risk?

Whether you’re an existing client or don’t yet use our services, we would be pleased to help you. Contact Mouktaris & Co Chartered Accountants for expert advice or click here to subscribe to our Newsletter.

Trading in Services post Brexit

To start off with some good news, the rules for services will largely remain unchanged after 1 January 2021- as things stand.

Trading in services with the EU can be categorised into three broad scenarios which will cover most UK traders.

Sales of business to business (B2B) services

The general B2B rule (VAT Notice 741A) stipulates that if the customer is outside the UK and in business, no UK VAT is charged on the services in question. The one change come 1 January 2021 concerns EU sales lists, which will not need to be completed.

Practically, it would still be wise to show the EU customer’s VAT number on the sales invoice, because it’s the best evidence of a B2B deal (though there are other source documents). Afterall it is the B2B outcome which means the place of supply is the customer’s country, thereby making the supply “outside the scope” of UK VAT.

Buying services from EU suppliers

The status quo is that a VAT-registered UK business that buys services from abroad must apply the “reverse charge”. This applies to supplies not just from the EU. After 31 December 2020, nothing is planned to change.

Where the reverse charge applies to services which you receive, you, the customer, must act as if you are both the supplier and the recipient of the services. You simply credit your VAT account with an amount of output tax, calculated on the full value of the supply you’ve received, and at the same time debit your VAT account with the input tax to which you’re entitled, in accordance with the normal rules. If you can attribute the input tax due under the reverse charge to your taxable supplies (and so can reclaim it in full) then the reverse charge has no net cost to you. This tends to be the case if you are in business. If you cannot attribute the input tax due the effect is to make you pay VAT on the supply at the UK rate. This puts you in the same position as if you had received the supply from a UK supplier rather than from one outside the UK.

Sales of business to consumer (B2C) services

The general rule is that VAT is charged based on the location of the supplier, as opposed to of the customer with B2B. So if a UK accountant completes a tax return for a private individual living in France, the fee will be subject to 20% UK VAT. Where a B2C customer resides outside the EU, say in Canada, most professional services are not subject to UK VAT. The services for which this rule applies are listed in VATA 1994, Sch 4A para 16 and VAT Notice 741A, paragraph 12.

One consideration for these late-in-the-day Brexit negotiations is whether legislation will be passed to remove the difference between selling services to an EU versus a non-EU consumer. As things stand and per the HMRC press announcement, following 31 December 2020 no VAT will be charged on B2C services supplied to EU customers under UK VAT law for the professional services in question. So the accountant will no longer charge UK VAT to their B2C customer in France. The only way this would change is if the French tax authorities introduced a “use and enjoyment” rule for B2C accountancy services, so that work for customers living in France would be subject to French VAT.

Use and enjoyment rules

The use and enjoyment rules are intended to make sure taxation takes place where services are consumed, where either services are consumed within the UK but would otherwise escape VAT, or they would be subject to UK VAT when consumed outside the UK and EU.

Effective use and enjoyment takes place where a recipient actually consumes services irrespective of the contractual arrangements, payment or beneficial interest. The services covered by these rules are:

  • the letting on hire of goods (including means of transport)
  • electronically supplied services (B2B only)
  • telecommunications services (B2B only)
  • repairs to goods under an insurance claim (B2B only)
  • radio and television broadcasting services

By way of example, consider a Canadian based videographer (in business) who tours the UK to video the Lake District, for a Canadian broadcaster. The Canadian videographer has hired a camcorder from a UK shop for a fee of £3,000. Under the general B2B rule, no UK VAT is charged on that sum- the place of supply being Canada- but now the use and enjoyment rules means that the place of supply reverts to the UK, where the camcorder is being used. He will be charged £600 VAT by the shop. This is the position that will take effect from 1 January 2021, for any businesses based outside the UK, including EU countries.

Whether you’re an existing client or don’t yet use our services, we would be pleased to help you. Contact Mouktaris & Co Chartered Accountants for expert advice or click here to subscribe to our Newsletter.

Trading with the EU post Brexit

Are you ready to do business with the EU?

With just over one month to go until the end of the transition period, there will be new rules to follow when trading with the EU post Brexit, from 1 January 2021 onwards.

The UK government seems intent on following through with its “no-deal” guidance, as it stands, despite not defining in any clear terms what benefits lie beyond. What is clear, is that the global playing field has evolved- consolidated, even since one month ago. The US president-elect has expressed his discord with a disjointed Europe and in Asia, fifteen countries have formed the world’s largest trading bloc, covering nearly a third of the global economy. One would expect these factors to shape the course of dialogue in the latest round of Brexit negotiations. Let’s hope it all proves to be a big anti-climax- which at this stage may come at best only in the form of a “window dressed” political agreement of reduced or zero tariffs.

We digress. You can find out what you need to do, as a business or as a citizen, by going to gov.uk/action-2021. The top actions you need to take now are:

Check the new rules on importing and exporting goods between the EU and Great Britain from 1 January 2021

Your business could face delays, disruption or administrative costs if you do not comply with new customs procedures from 1 January 2021. We will be releasing additional guidance on trading with the EU, specifically concerning VAT and import duties, in due course. A policy paper on how the border with the European Union will work after the transition period is available at gov.uk/government/publications/the-border-operating-model.

If you are planning to recruit from overseas from 1 January 2021, you will need to register as a licensed visa sponsor

You may not be able to legally hire people from outside the UK if you do not have a licence. New employees from outside the UK will also need to meet new job, salary and language requirements. Irish citizens and those eligible under the EU Settlement Scheme are not affected.

Use gov.uk to identify changes affecting manufactured goods, such as new marking requirements or approval needed, to ensure your business is ready to sell them in the UK and EU

You may not be able to sell your goods in the UK and the EU from 1 January 2021 unless you act.

If you are moving goods into, out of, or through Northern Ireland, check the latest guidance

Whether you’re an existing client or don’t yet use our services, we would be pleased to help you. Contact Mouktaris & Co Chartered Accountants for expert advice or click here to subscribe to our Newsletter.

Coronavirus: Latest version of the Furlough Scheme

On 5 November, the Chancellor announced that the CJRS would be extended until the end of March 2021 for all parts of the UK. Employers want to know the details announced yesterday, as employees hope this will be enough to secure their jobs.

HMRC has circulated a short round-up explaining the impacts of this and where to find more information. The new and updated collection of advice notes can all be accessed from a single page: gov.uk/government/collections/coronavirus-job-retention-scheme.

What’s happening

CJRS has been extended to 31 March for all parts of the UK. From 1 November, the UK Government will pay 80% of employees’ usual wages for the hours not worked, up to a cap of £2,500 per month. Employers will continue to pay for hours worked as normal. The Government will review the policy in January.

Who is eligible

Employers and their employees do not need to have used the scheme before to claim for periods from 1 November. Employers can claim for employees who were employed on 30 October 2020, as long as a PAYE RTI submission was made to HMRC between the 20 March 2020 and 30 October 2020, notifying a payment of earnings for that employee.

Reference pay

All employees on an RTI submission on or before 19 March 2020 will be able to use the CJRS calculations as applied in August 2020 for reference pay and usual hours. For new employers claiming and new employees hired between 20 March 2020 and 30 October 2020, the average of tax year 2020 to 2021 up to the start of the furlough provides the basis for calculation (for fixed pay employees its the last pay period prior to 30 October 2020).

Legal matter

Employers should discuss with their staff and make any changes to the employment contract by agreement. To be eligible for the grant, employers must have confirmed to their employee in writing that they have been furloughed. Our clients can contact our office and we will provide you with a template agreement.

Compliance and monitoring

HMRC intend to publish details of employers who use the scheme for claim periods from December, and employees will be able to find out if their employer has claimed for them under the scheme.

Further updates

  • As a consequence, the Job Support Scheme will start on 1 April 2021 at the earliest
  • It also means that the £1,000 Job Retention Bonus will now not be paid in February 2021. The government said they will redeploy a retention incentive at the appropriate time.
  • The Self-Employment Income Support Scheme (SEISS) grant for November-January will cover 80% of average monthly trading profits, paid out in a single instalment covering three months’ worth of profits, and capped at £7,500 in total. This is an increase from 55% and £5,160 respectively, previously announced.
  • As of 2 November, application deadlines have been extended until 31 January 2021 for the:
    • Bounce Back Loan Scheme
    • Coronavirus Business Interruption Loan Scheme
    • Coronavirus Large Business Interruption Loan Scheme
    • Future Fund
    • Covid Corporate Financing Facility

The extended generosity by the government comes at a cost. How precisely all of the various coronavirus schemes will be financed is highly uncertain.

Whether you’re an existing client or don’t yet use our services, we would be pleased to help you. Contact Mouktaris & Co Chartered Accountants for expert advice or click here to subscribe to our Newsletter.

Coronavirus: additional schemes and updates

Chancellor Rishi Sunak has vowed to “go further” as he announced the government’s latest Plan for Jobs: three new measures to help workers and businesses get through lower demand over the winter due to a coronavirus second spike. The most significant announcements concern the Job Support Scheme (JSS), which will be made up of two parts: JSS Open and JSS Closed. Both will start on 1 November, the day after the Coronavirus Job Retention Scheme (CJRS) finishes, and run for six months.

JSS Open

JSS Open will provide support to businesses that are open where employees are working shorter hours due to reduced demand.

  • Employees will need to work at least 20% of their usual hours and employers will continue to pay employees for the hours they work.
  • For the hours not worked:
    • The UK government will pay a contribution of 61.67% of the usual pay, up to a maximum of £1,541.75 per month.
    • Employers will pay 5% of the usual pay, up to a maximum of £125 per month, and can top this up further if they choose.
    • Employees should receive at least two thirds of their usual pay for hours not worked, where they earn £3,125 a month or less.
  • Employers will need to cover all employer National Insurance and pension contributions.

When JSS was originally announced, the government’s and the employer contribution to wage costs was to be one third each of the hours not worked.

JSS Closed

JSS Closed will provide support to businesses whose premises are legally required to close as a direct result of coronavirus restrictions set by one of the four governments of the UK. This includes premises restricted to delivery or collection-only services from their premises, and those restricted to providing food and/or drinks outdoors.

For JSS Closed, the UK government will fund two thirds of employees’ usual wages for time not worked, up to a maximum of £2,083.33 per month. Employers will not be required to contribute, but they can top up the government’s contribution if they choose to. Employers will still need to cover all employer National Insurance and pension contributions.

Self-employment Income Support Scheme (SEISS) Grant Expansion

It was previously announced that SEISS would cover 20% of monthly profits for the period from November 2020 to January 2021, capped at £1,875 in total. The UK government is now doubling the value of the first grant to 40% of three months’ average trading profits, paid out in a single instalment, and capped at £3,750. HMRC will provide full details about claiming and applications in mid-November. The second grant will cover a three-month period from the start of February until the end of April. The government will review the level of the second grant and set this in due course.

Grants for businesses in Tier 2 and Tier 3 Areas

Businesses in England in Very High alert level areas (Tier 3) will now be able to claim grants, regardless of whether they are legally required to close or remain open. The grant will be:

  • £1,300 per month for businesses occupying a property with a rateable value of less than £15,000
  • £2,000 per month for businesses occupying a property with a rateable value of less than £51,000 or occupying a property or part of a property with annual rent or mortgage payments of less than £51,000
  • £3,000 per month for businesses occupying larger properties

Hospitality, hotel, B&B and leisure businesses in England in High alert level areas (Tier 2) will now also be able to claim grants. The grant will be:

  • £934 per month for businesses occupying a property with a rateable value of less than £15,000
  • £1,400 per month for businesses occupying a property with a rateable value of less than £51,000
  • £2,100 per month for businesses occupying a property with a rateable value of greater than £51,000

Businesses in other sectors may also be eligible at the local authority’s discretion and we urge our clients to maintain communication with their local authority where possible, as discretionary grants are often made available at short-notice.

Businesses in any area which has been under enhanced restrictions can backdate their grants to August.

Whether you’re an existing client or don’t yet use our services, we would be pleased to help you. Contact Mouktaris & Co Chartered Accountants for expert advice or click here to subscribe to our Newsletter.

Winter Economy Plan

Chancellor Rishi Sunak today delivered a statement setting out plans to help workers and businesses hit by new coronavirus restrictions. With plans for an Autumn 2020 Budget cancelled, the Chancellor announced his Winter Economy Plan. In it he outlined how the various government support schemes to help businesses through the coronavirus restrictions will be extended or remodeled.

Job Support Scheme

As now anticipated, the introduction of the new Job Support Scheme (JSS) will come into effect on 1 November after the Coronavirus Job Retention Scheme (CJRS) ends. Under JSS, which will last for six months, employees who work at least 33% of their hours will be paid for two thirds of the hours they do not work, shared equally between the employer and the government.

The result is that an employee working 33% of their normal hours will receive 77% of their pay: 55% paid by the employer and 22% paid by government.

Other measures

  • The self-employed grant is extended on similar terms to the JSS. A grant will be available to those eligible for the Self Employment Income Support Scheme (SEISS) and will cover 20% of monthly profits for the period from November 2020 to January 2021. A further grant to cover February 2021 to April 2021 may become available, depending on circumstances. [22/10/2020 UPDATE]: In his third economic statement within the last month, the Chancellor confirmed more generous terms for the remaining SEISS grants. The level of the third grant will be based on 40% of average trading profits, rather than the previously announced 20%, and will be capped at £3,750. The level of the fourth grant is to be kept under review and announced in due course. [Subsequent UPDATE]: The Chancellor confirmed once again even more generous terms for the remaining SEISS grants. The level of the third grant will be based on 80% of average trading profits, rather than the previously announced 20% then 40%, and will be capped at £7,500.
  • Businesses that deferred a quarterly VAT payment during the lockdown previously had to pay this back by 31 March 2021 – now they will be able to spread this over 11 months during 2021/22. Businesses will need to opt in, but all are eligible.
  • Individuals who deferred their July 2020 self-assessment tax liabilities till January 2021 will now not need to pay that till January 2022. Taxpayers with up to £30,000 of Self-Assessment liabilities due, including liabilities that will become due in January 2021, will be able to use HMRC’s self-service Time to Pay facility to secure a plan to pay over an additional 12 months. Any Self-Assessment taxpayer not able to pay their tax bill on time, including those who cannot use the online service, can continue to use HMRC’s Time to Pay Self-Assessment helpline to agree a payment plan.
  • The VAT reduction to 5% for the hospitality sector will be extended from 12 January 2021 to 31 March 2021.
  • The extension of Coronavirus Business Interruption Loan Scheme (CBILS) and Bounce Back Loan Scheme (BBLS) loans from six to ten years.
  • BBLS loans will become known as “Pay as You Grow” – businesses will enjoy a flexible repayment system which will include interest-only periods of up to six months and payment holidays.
  • Applications for new loans under BBLS, CBILS, the Coronavirus Large Business Interruption Loan Scheme and the Future Fund remain open till the end of November 2020.

Whether you’re an existing client or don’t yet use our services, we would be pleased to help you. Contact Mouktaris & Co Chartered Accountants for expert advice.

Technology and Professional Services Grant for SMEs

The government has announced details of new funding, designed to help small and medium sized businesses (SMEs) access technology and advice. SMEs will have access to grants of between £1,000 – £5,000 to help them access new technology and other equipment as well as professional, legal, financial or other advice to help them get back on track. The programme is due to launch in September.

Funds could be deployed to help businesses in the following ways:

  • Advice on implementing technologies to streamline operations, for example apps to organise rotas and reporting for staff
  • Equipment to facilitate efficiencies, including with respect to financial reporting or continuing to deliver business activity in response to COVID-19
  • Legal advice regarding getting back on track and managing stakeholders, including HR
  • Professional advice to review business strategy or business models
  • Coaching and mentoring in leadership and management development
  • Innovation strategy to adapt and diversify products or services
  • Developing or revising marketing or digital strategies to reach new markets
  • Mitigating the impact of social distancing measures
  • Legal and environmental health compliance
  • Skills analysis and development plans
  • Employee engagement, welfare and wellbeing

Mouktaris & Co provide many of the services which will be eligible for this support, including accountancy services, business advice, legal services and HR support. If you have considered a project or initiative to develop your business, the grant program may be suitable for you. You can access the funding – provided by the England European Regional Development Fund – as part of the European Structural and Investment Funds Growth Programme 2014-2020, through 38 growth hubs within a Local Enterprise Partnership (LEP) area. If you are interested in support, advice or funding associated with your business venture, please contact your nearest LEP growth hub.

Further information

  • The support will be fully funded by the Government with no obligation for businesses to contribute financially.
  • Amongst other eligibility criteria, a business must have been trading on or before 1st March 2019 and should still be trading.
  • The grant must cover 100% of the service a business is procuring (up to a maximum total project value of £5,000). The grant cannot be used to part-fund expenditure.
  • Grants must be claimed within one month of receiving confirmation that the application has been accepted and upon production of an invoice for the claimed service or goods.
  • Growth Hubs work across the country with local and national, public and private sector partners – such as Chambers of Commerce, FSB, universities, Enterprise Zones and banks, coordinating local business support and connecting businesses to the right help for their needs. They are locally driven, locally owned and at the heart of the government’s plan to ensure business support is simpler, more joined up and easier to access. A Growth Hub will therefore encourage you to utilise specialist advice from a local supplier.
  • The funding being provided to businesses is supported by the England European Regional Development Fund as part of the European Structural and Investment Funds Growth Programme 2014-2020. The funding has been allocated to Growth Hubs within each LEP area in line with the current ERDF Programme.

Whether you’re an existing client or don’t yet use our services, we would be pleased to help you. Contact Mouktaris & Co Chartered Accountants for expert advice, including ideas on deploying funds to help your businesses grow.

Professional Services Firm: LLP or LTD

We are often asked to advise our Professional Services clients on the optimal operating model: LLP or limited company (LTD).

Whilst the statutory and accounting filing requirements are similar across both structures, the LLP was introduced to offer flexibility in management and pay: both important in human-capital-intensive Professional Services Firms. An LLP is controlled by its Members and governed by the Members Agreement, whilst a company is controlled by its shareholders under the articles of association and shareholders’ agreement.

Soon after their introduction, LLPs became the go-to model for Professional Services Firms because of the ability to:

  1. split partnership profits between Individual Members, taxed at income tax rates, to reflect profit or performance targets;
  2. appoint a Corporate Member to absorb “excess partnership profits” in a given financial year, taxed at a lower (corporation) rate of tax and available for reinvestment in the business;
  3. appoint and remove partners without the complex process and costs of them conferring or relinquishing shareholdings, and without the tax costs were any shares obtained at undervalue.

Tax

We know that LLPs are tax transparent and that Individual Members are usually treated as self-employed and taxed at income tax rates, subject to HMRC tests. On the contrary, a company pays corporation tax on profits: a company’s directors receive salaries subjected to PAYE whilst its shareholders pay income tax on dividends voted by the directors.

Some of the benefits of an LLP therefore centre around the following:

  1. An Individual Member of a trading LLP is taxed as if they are carrying on a trade directly for income tax purposes. This treatment carries certain tax advantages compared to the treatment of employees:
    1. Expenses are generally deductible for tax purposes if they are wholly and exclusively incurred for the purposes of the trade. This is in comparison to wholly, exclusively and necessarily incurred for employees.
    2. Pay as you earn (PAYE) does not apply and tax is generally only payable twice yearly rather than monthly as the individual members are not employees.
    3. Employer national insurance contributions (NICs) (currently 13.8%) are not payable in respect of the amounts payable to the individual members of the LLP as they are not employees.
  2. Members can flexibly adjust how the LLP is governed as Members arrive and leave and how Members are remunerated.

Pre-2014: LLP the way to be

Previously and in accordance with a Profit Sharing Agreement (part of the Members Agreement), LLPs enjoyed the ability to apportion taxable profits between Individual Members and Corporate Members, who pay contrasting rates of tax (sometimes 45% vs 19%). LLPs proved to be an effective structure for the governance of a Professional Services Firm, whilst also offering a “hybrid model” of taxation, whereby Individual Members were taxed at income tax rates on income drawn and presumably spent, whilst Corporate Members were taxed at a lower corporation tax rate on excess profits retained for capital expansion of the business.

Post-2014: LLP attack

The mixed membership partnerships anti-avoidance legislation of Finance Bill 2014 brought about a significant change in partnership taxation. Leading up to the change in law, it had become relatively common to see partnerships (including LLPs) with mixed Individual and Corporate Members. In short, the legislation provided for profits allocated to a non-individual partner (B) in a mixed member partnership to be reallocated to an individual partner (A), such that they are taxed at the individual partner’s rate of tax, if either:

  1. Condition X: it is reasonable to suppose that:
    1. B’s profit share includes an amount representing A’s deferred profit; and
    2. A’s profit share and the total amount of tax for which A and B are liable (relevant tax amount) are lower than they would have been absent the deferred profit arrangements.
  2. Condition Y: B’s profit share exceeds the appropriate notional profit, A has the power to enjoy B’s profit share and it is reasonable to suppose that:
    1. B’s profit share (or part of it) is attributable to A’s power to enjoy; and
    2. A’s profit share and the relevant tax amount are lower than they would have been absent A’s power to enjoy in B’s profit share.

Almost overnight, the mixed membership partnership rules led to a decrease in the popularity in the use of LLPs with Corporate Member structures amongst the SME business community and in some cases the unwinding of existing LLP structures.

Action

For mixed partnerships, the following steps could be considered:

  • Outright incorporation. This clearly removes the issue of reallocation and provides a deferral of higher tax rates while the company retains the profits.
  • Eliminate the corporate members and accept the income tax result. This in effect concedes the full impact of the new rules, so could be combined with exploring other approaches.
  • Establish a company owned by the partnership to operate the business with or without the capital assets, ie the corporate is a subsidiary, not a partner. This may provide a possible solution in allowing ownership to change in a partnership rather than a share capital company, but with suitable profit retention for working capital by the operating company.
  • Retain the existing structure with corporate members’ shares in amounts that can be justified by the new rules for services or the provision of capital.
  • Consider the use of alternative business structures which should not result in reallocations between partners. These require specialist consideration by reference to the case and a range of other relevant legislation.

Clearly the tax effects of making a change will need full review, such as the availability of incorporation relief from capital gains tax, stamp duty land tax, and the impact of entrepreneurs’ relief. You can rely on our expertise surrounding companies, partnerships and tax for the delivery of the sound ideas needed to put plans into action:

  • We help businesses manage all aspects of structure from set-up and management to dispute resolution and exit strategies
  • We look at tax structures
  • We understand the differences in structure between a partnership and a company;
  • We advise on adapting a structure that is no longer fit for purpose.

Contact Mouktaris & Co Chartered Accountants for help planning your Professional Services Firm expansion.

Summer Statement 2020: summary

Four months after using his Spring Budget speech to announce the government’s first round of economic stimulants for supporting households and businesses through coronavirus, the chancellor yesterday cemented his status as the government’s Santa Claus, lavishing more gifts to Christmas 2020 and beyond.

It was branded as ‘A Plan for Jobs’ with a focus on supporting, creating and protecting UK employment. Here are some of the key measures announced by the Chancellor, and their implications for taxpayers.

STAMP DUTY

  • A temporary increase in the Nil Rate Band of Residential stamp duty land tax (SDLT) in England and Northern Ireland, from £125,000 to £500,000. This will apply from 8 July 2020 until 31 March 2021 and cut the tax due for everyone who would have paid SDLT.
  • Saves £15,000 on a transaction valued at £500,000.
  • House buyers will only face a bill for stamp duty if they are spending more than £500,000 on a main property

“JOB RETENTION BONUS” TO ENCOURAGE FIRMS TO RETAIN FURLOUGHED STAFF

  • A one-off £1000 payment to employers for every furloughed employee retained to the end of January 2021
  • Applies to workers earning over the Lower Earnings Limit of £520 per month on average between the end of CJRS and the end of January 2021

SIX-MONTH VAT CUT FOR RESTAURANTS, HOTELS AND ATTRACTIONS

  • A cut in VAT from 20% to 5% for the hospitality and tourism sectors from 15 July 2020 until 12 January 2021
  • Food and non-alcoholic drinks in restaurants, pubs and cafes, as well as hot takeaway food will be covered
  • Accommodation in hotels and B&Bs and admission to attractions such as theme parks and cinemas also affected

APPRENTICES, TRAINEES AND WORK PLACEMENTS

  • A new grant of £2,000 will be made available to employers in England for each new apprentice they hire aged under 25, and a £1,500 payment for each new apprentice they hire aged 25 and over, from 1 August 2020 to 31 January 2021.
  • Employers who provide trainees with work experience will be awarded a further £1,000 per trainee.
  • Under the new “Kickstart Scheme”, £2bn has been allocated to fund 6-month work placements for people aged 16-24 and deemed at risk of long-term unemployment. Funding will cover 100% of National Minimum Wage for 25 hours per week plus associated National Insurance Contributions and automatic pension enrolment contributions.

EAT OUT TO HELP OUT

  • Scheme offers 50% discount for every restaurant diner, up to £10 a head, from Monday to Wednesday throughout August
  • Covers food and non-alcoholic drinks only
  • Applies at participating restaurants, pubs, cafes etc
  • Restaurant owners can claim the discount in full from the government via an online form to be circulated

GREEN HOMES GRANT

  • From September, homeowners will be able to apply for vouchers worth up to £5,000 per household for projects to make homes more energy efficient in England
  • Will match owners or landlords’ spend, £2 for £1 for most homes
  • Up to £10,000 per household fully funded for low-income households

We are doing everything we can to help our business community. If you would like to discuss how the changes or the coronavirus pandemic may affect you or your business, please do not hesitate to contact us on 020 8952 7717 or use our online enquiry form.

The Coronavirus Local Authority Discretionary Grants Fund

The Chancellor announced further government support to small businesses with fixed property costs, that are not eligible for the Small Business Grant Fund or the Retail, Hospitality and Leisure Grant Fund.

The grant is designed to allow businesses to continue meeting their property-related overheads, so that in turn less strain is placed on landlords, who of course have their own commitments and obligations.

These businesses may now be eligible for a grant of £25,000, £10,000 or any amount under £10,000. Critically, grants will be awarded to eligible businesses on a first-come, first served basis until all the fund has been allocated. We encourage our clients who believe that they may be eligible to visit their local council’s website to find out how to apply. The local council will run an application process and decide whether to offer the grant.

ELIGIBILITY
You may be eligible if your business:

  • is based in England
  • has relatively high ongoing fixed property-related costs
  • occupies property (or part of a property) with a rateable value or annual mortgage/rent payments below £51,000
  • was trading on 11 March 2020
  • did not claim under another government grant scheme, such as the Small Business Grant Fund or the Retail, Hospitality and Leisure Grant

Local councils have been asked to prioritise businesses such as:

  • small businesses in shared offices or other flexible workspaces, such as units in industrial parks or incubators
  • regular market traders
  • bed and breakfasts paying council tax instead of business rates
  • charity properties getting charitable business rates relief, which are not eligible for small business rates relief or rural rate relief

You will need to show that your business has suffered a significant fall in income due to coronavirus and you should contact our office if you require assistance putting together a claim.

We are doing everything we can to help our business community. If you would like to discuss how the changes or the coronavirus pandemic may affect you or your business, please do not hesitate to contact us on 020 8952 7717 or use our online enquiry form.

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